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Digging Deep

Alliance Resource Partners’ (ARLP) earnings came in strong as the partnership continues to be the model of consistency in the coal universe. Combined with the company’s defensive positioning within the volatile market (fully contracted for 2013), ARLP appears set to continue its operational efficiency into 2013. With a strong production growth trajectory supporting continued distribution growth, we reiterate our Strong Buy rating with an $84 price target.

Distribution growth trend continues: Despite the tumultuous market environment, Alliance continues its streak of solid distribution growth with 4Q12’s distribution of $1.1075. This represents sequential growth of 2.1% and approximately 12% year over year.

The distribution equates to $4.43 annually or a yield of 6.9% as of Tuesday’s close. ARLP has maintained its impressive distribution track record of double-digit annual growth, with 19 straight quarters of distribution growth. Furthermore the company’s 4Q12 total unit coverage is a stout 1.6 times earnings. Going forward we are modeling distribution growth of 2% sequentially.

2013’s guiding light: Alliance’s 2013 guidance was a bit lighter than we had expected, and likely bakes in a decent amount of conservatism. Management expects 2013 production and sales volumes in the 38.1 million-39.1 million ton (MT) range, which is fully contracted at the midpoint. Additionally, the company’s guidance does not include any metallurgical sales (which we had baked in), given the weak market. Overall we are expecting 2013 net income of $334 million, (near the middle of management’s $300-350 million range) with 2013 EPU of $5.65.

Natural Resource Partners L.P. (NRP) is a publicly traded partnership that sub-leases its land and mineral rights on a royalty-producing basis. The company’s lessors produced approximately 54 MT of coal in 2012 (approximately 32% of which was metallurgical) from an estimated reserve base of 2.1 billion tons.

Natural Resource Partners reported Q4’12 EPU of $0.58 vs. $0.49 a year ago (ex-items). Our estimate was $0.40 and consensus was $0.41. Earnings before interest, taxes, depreciation and depletion were $91.9 million vs. $85.9 million a year ago.

Coal tonnage was up about 41% year over year with steam and metallurgical up approximately 44% and 35%, respectively. Pricing was down roughly 29% year over year, however, with steam down about 35% (significantly impacted by one low royalty facility) while metallurgical was down roughly 18% in a broadly soft market.

We are forecasting relatively flat volume for 2013 and 2014 with price weakness slowing near-term and reversing into 2014. As a result, we are reducing our EPU estimate for 2013 from $1.85 to $1.66 and are inaugurating a 2014 estimate of $1.85. With the distribution currently yielding nearly 10%, we reiterate our long-term Buy rating and 24-month price target of $30.

During the fourth quarter, the company closed on the acquisition of a “frac” sand operation in Wisconsin and on about 88,000 net acres of oil and gas land in the Marcellus Shale. We believe these transactions are indicative of the company’s ability to continue to drive revenue growth despite the lingering disruption of the coal markets.